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30th Sep 2022

Watchdog urges creation of EU bad bank

  • Eurozone chief, Jeroen Dijsselbloem and Klaus Regling (r) need to hammer out the Greek loan with the IMF (Photo: Council of the EU)

The European Union should create a publicly-funded asset management company to sweep up the bad loans choking economic growth, the bloc's banking watchdog said on Monday (30 January).

The European Banking Authority (EBA) said dealing with the non-performing loans was "urgent and actionable".

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The EBA's chairman, Andrea Enria, said in Luxembourg that there needs to be a market created for bad loans, which could push up their price.

The asset management company, acting as a bad bank, would attempt to try to sell the bad loans at an assessed "real economic value".

If the company would not be able to get rid of the loan in three years, it would have to take the market price hit.

According to the plan, the bill would have to be backed up by the creditors and the lender's home countries, so the risk would not be shared among EU states, something that countries like Germany have been reluctant to sign up to.

Enria said some sort of public funding would be needed to kickstart such a bank, however.

The EBA's plan was backed by Klaus Regling, head of the European Stability Mechanism, the euro area's bailout fund, who added that the new entity should aim to acquire up to €250 billion of bad loans.

The EBA, the collection of EU national banking authorities, does not have the power to propose such a bad bank.

It warned that the EU risks reacting even slower than Japan did in the 1990s when it was overburdened with debt during its "lost decade" of growth, however.

The EU banking system has some €1.06 trillion of non-performing loans, amounting to 5.4 percent of the sector’s total loans.

That is more than triple of the level in the banking systems of Japan or the US.

Italian banks account for a quarter of these with €276 billion of bad loans.

IMF dispute

The EBA's suggestion comes amid a dispute between the International Monetary Fund (IMF) and the European Union over continued financing of the Greek bailout.

Greece will only receive more loans from the euro area if the IMF joins its latest aid programme, Regling said Monday.

The IMF said it wants Greece's creditors, including Germany, to write off some of the debt if the Greek bailout is to be sustainable, but the EU creditors are not happy with the idea.

Meanwhile, Greece needs a new tranche of financial aid under its €86 billion 2010 bailout by the third quarter of the year or it faces default.

The IMF will discuss the issue on 6 February.

The IMF has also published a paper saying that political bias contributed to weak euro-area fiscal discipline.

Politics of debt

It examines the significant accumulation of public debt in the past three decades in the eurozone, focusing on political aspects of the issue.

Public-debt-to-GDP ration of the euro zone increased from an average of less than 60 percent of GDP in the early 1990s to more than 90 percent of GDP in 2015.

The IMF paper says EU fiscal rules were bent far too often and that monitoring of compliance was too weak.

Policy decisions made in the hopes of winning an election, bias in the enforcement of fiscal rules, and avoiding actions that were politically costly for other member states created a culture of leniency and lack of transparency, the IMF said.

The lack of democratic oversight also factored into weak enforcement of EU fiscal rule and growing debt, with national politicians blaming Brussels for difficult decisions.

Creditors put more pressure on Greece

Eurozone finance ministers demand the Greek government adopt new austerity measures for the future or risk the end of the bailout programme.

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